COVID-19 and Insurance Coverage For Businesses

On 11 March 2020, the World Health Organization officially characterised COVID-19 as a pandemic, raising the health emergency to its highest level. The situation appears ominous as the number of cases of the virus has increased exponentially globally, with about 114 countries affected. Currently, while the increase appears to be have slowed significantly in China, other countries are now experiencing worrying signs of community outbreak. In the past two weeks, the number of cases outside China has increased 13-fold.

Countries are implementing unprecedented measures to curb the spread of the virus, including cancelling all mass gatherings, closing schools and public facilities, and suspending non-essential travel from high-risk countries as well as quarantine measures. The outbreak has already had an impact on many businesses and the measures undertaken are compounding the challenges these businesses are facing. From an insurance perspective implications for various lines include travel, medical, credit, event cancellation and business interruption. As businesses struggle to pay bills, insolvencies will increase and this will impact trade credit insurers. Certain travel insurers in the UK have withdrawn cover for future coronavirus claims. This legal update however will focus on business interruption insurance and event cancellation. 

(i) Business Interruption Insurance

Businesses often insure against the risk of material damage to property, including risk of business interruptions arising from such property damage resulting in partial or total closure of the business, which in turn leads to loss of profits. Insurance against such losses is often called “business interruption” insurance (BI). 

Traditional BI coverage is limited to where the commercial property suffers typical exposures, such as a fire, a flood, or other natural disasters. Where a business suffers interruption due to a pandemic, and has to suspend operations, this exposure does not fall within the definition of “physical damage” in the property policy. Business interruption policies may however extend cover to business interruption even when there is no physical damage, for example, denial of access or more specifically in this situation, infectious diseases extension. This type of cover is not always included. At least one court in the US is being asked by policyholders to broaden the “physical damage” requirement to include COVID-19, even though the policy does not have the express extension to infectious diseases. Cajun Conti, LLC et a. v. Certain Underwriters at Lloyd’s London et al., Civ. Dist. Ct. La. (2020).

Although there are standard wordings, whether businesses can recover for losses arising from COVID-19 depends on the specific wording of their insurance policies, as such extensions are often subject to negotiation and dependent on the nature of the business risk. The insuring clause of an infectious diseases extension may provide that losses result from notifiable human infectious or contagious disease. Coverage is thus contingent on whether the relevant government authority has declared the disease to be notifiable and prior to the disease being declared as such, business interruption losses suffered by the insured will not be covered. 

Other common wordings include “closing of the premises by order of a public authority as a result of an outbreak of a notifiable disease”. This requires a closing order from a public authority, narrowing the scope of coverage. Depending on the actual wordings of their policies, businesses which have decided to suspend operations voluntarily to avoid spreading the virus would not be able to claim on their policies. 

Another type of extension is contingent BI, which covers losses suffered as a consequence of damage to property of any direct supplier or customer. Contingent BI may also cover non-physical business interruption, which means businesses may claim for losses arising from the forced closure of suppliers or customers around the globe. Again, this depends on the wording of the policies. 

It is also important to note that to seek cover for business interruption losses, the insured needs to prove that the COVID-19 outbreak (or government restrictions) caused the losses claimed. This may be difficult when there is general downturn in business. For example, even before the mandatory closure of the business, very few customers may have been visiting the insured’s business due to fear of the virus. Additionally, a business may choose to voluntarily close its doors due to decreased patronage or fears of employee safety. In these situations, there may be various issues on the quantification of the loss. 

With uncertainty around whether policies provide cover for losses arising from COVID-19, it remains to be seen whether insurers will develop bespoke policies providing specific cover by way of an extension to the traditional business interruption policy or have such losses subject to higher deductibles or sub-limits. In the US, most BI policies are narrowly drafted and exclude coverage for infectious diseases and pandemics.

(ii) Event Cancellation Insurance

Event cancellation insurance covers losses arising from the cancellation of one-off events. Professional sporting events, festivals, concerts, and conventions may be costly to plan and host. Countries have already cancelled top-league sport events, artists have cancelled concert tours, and even the upcoming Olympics to be held at Tokyo this year is under the looming threat of COVID-19. 

The coverage of any event cancellation insurance depends on the wording of the policy. Some may be general and offer cover for cancellation due to any reason beyond the control of the event organiser, whereas some may specify the reasons for cancellation. Businesses also have to be aware of any exclusion for communicable or contagious diseases. These exclusions may include cancellations arising from fear of the spread of a pandemic.

Conclusion 

Businesses should review their insurance policies to assess whether they are adequate to protect against the risk of losses arising from COVID-19. Coverage needs to be assessed on a case-by-case basis with careful review of the policy wordings. There is no one-size-fits-all solution.